How to Design the Optimal Early-Stage VC Portfolio

Explore the findings of the trillion portfolio simulations and practice Portfolio Simulator yourself to determine the optimal VC portfolio construction.

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The optimal early-stage venture capital portfolio relies on 2 widely used approaches:

  • A large portfolio with more randomly allocated capital.
  • A small, concentrated portfolio consisting of investments in the best-evaluated companies.

The early-stage VC portfolio’s performance heavily depends on the following variables:

  • Decision quality
  • Portfolio size
  • Ticket sizing
  • Whether or not, and how much, you follow-on
  • Upper bound on ROI (of a single investment)

A deeper analysis of the variables, influencing VC portfolio performance, brings practical tips and valuable insights to design an optimal portfolio construction:

  • The probability of increasing the fund grows, and the probability of losing the fund decreases with the growing size of your portfolio.
  • The probability of higher multiplying the fund increases with investments into fewer companies, while the risk of losing also increases.
  • To keep the probability of deliberately multiplying the fund with a lower risk of losing, create a large portfolio. Doubling the fund is almost a certainty for portfolios larger than 200 companies.
  • Investing equal amounts in every company in the portfolio is a good moderate strategy.
  • From the fund’s perspective, it is better not to make follow-on investments, unless it’s absolutely the best way for you to deploy that capital.
Run some experiments with the Portfolio Simulator by Moonfire to define your own optimal VC portfolio strategy.

Source: Moonfire